PL EN


2012 | 29 | 115-144
Article title

Simple is better. Empirical comparison of American option valuation methods

Content
Title variants
Languages of publication
EN
Abstracts
EN
Technique for American options valuation, combining Least Squares Monte Carlo with Duan\’s model under the assumption that the volatility of the underlier can be described by GARCH(1, 1) process, has been confronted with simple binomial tree model. Results of comparison of model outcomes with market prices for ten different CBOE-traded stock options indicate that simple binomial model is superior to sophisticated GARCH-LSM method. The results hold regardless of option characteristics—“moneyness” ratio and time to maturity. Incorporating dividend in binomial model does not significantly alter the valuation outcomes. Detailed analysis shows also that for each of the methods pricing errors grow as the “moneyness” ratio decreases.
Contributors
  • Department of Economics, University of Warsaw
References
Document Type
Publication order reference
Identifiers
YADDA identifier
bwmeta1.element.desklight-b44889f6-d853-4852-b47a-d509b1a64e61
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